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December
27

The strange sound you hear coming from the TV is not a problem with reception, but perception.  It's the media's opinion regarding the "impending doom" certain to hit the nation as the fiscal cliff deadline quickly approaches. 

Since none of us has a remote control that fast forwards our lives like Adam Sandler's character in Click, we can only guess on how the fiscal cliff will impact our lives—especially for those in the real estate market.

As Washington's lawmakers meet for negotiations, media reports abound about increased taxes, higher unemployment, decreased business spending, debt ceiling doubts, and expiring unemployment deadlines.  If you listen (and read) carefully, terms like "could," "possible" and "might" are sprinkled throughout the reports. The truth is none of us knows for sure what is going to happen. 

Many Old Dominion Realty customers have voiced concern regarding the fiscal cliff and future real estate transactions.  Let's take a look at the facts surrounding the fiscal cliff and its impact on the US housing industry.

Bipartisan cooperation is lacking during these Washington summits, allowing each side to create its own agenda for scaling different sides of the cliff instead of working together.  Regardless of how politicians deal with the fiscal cliff, real estate markets — now seeing a boost in activity — will be influenced.  The question is how?

Much will depend upon how the combination of government spending reductions and tax cut expirations are handled. If Washington takes a moderate approach (extending tax cuts and the mortgage interest deductions), financial experts feel the results on housing would be positive.

If elected officials opt for allowing tax cuts to expire, cutting government spending, and eliminating mortgage interest tax deductions, the outcome for the now-healing housing market would have an opposite effect.

In a recent article on Investors.com Jed Kolko, chief economist at Trulia.com, stated, "The best-case scenario is a deal that avoids sharp tax increases and spending cuts next year.  With that kind of deal, you would avoid stalling or reversing the economic recovery while at the same time creating a long-term path for getting the government budget more in balance."

There are three possible scenarios:

  1. No agreement is reached.  Tax cuts expire, taxes increase, and deep government spending cuts are applied. The overall real estate market would suffer negative consequences. From a homebuyer's standpoint, this would mean higher tax rates and less take home dollars.  Potential homebuyers would have less money to spend and have no choice but to purchase a lower priced property or even to postpone their home purchase entirely.

Some experts feel a combination of spending cuts and tax increases would catapult the country's economy back into a recession—never a positive sign for the real estate industry.

  1. Democratic Party's Answer to Fiscal Cliff.  Under this proposal, tax rates are increased on households earning more than $250,000.  This option leaves tax deductions and mortgage interest deductions unscathed for the most part except for the luxury real estate market.
  2. Republication Party's Answer to Fiscal Cliff – The Republication party's answer involves generating $800 billion in new revenues.  Bush tax cuts would be extended for one year with revenue being raised in other areas including ending tax breaks.  The elimination of which tax breaks have not been detailed, but experts feel the mortgage interest deduction would definitely be "on the chopping block".

The primary worry for most homeowners is how Washington will handle tax deductions for home mortgages.  On one side, Washington appears to be considering reducing it or eliminating it because it represents about a $100 billion loss in annual revenue for the government.  On the other side, the mortgage interest deduction supports the US housing market by making home ownership more affordable.  Its elimination would be like kryptonite to the real estate industry. Real estate groups continue to lobby to keep the deduction in place.

Even if Washington arrives at a mutually beneficial agreement on reducing spending and raising revenue by the end of 2012, the real estate market won't be off the hot seat until specific details are released.

The moral of the story is every news report will put a different spin on the fiscal cliff and its impact on the real estate market.  Unless you own a crystal ball, the only thing to do is to wait and see what 2013 brings.

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